• D/G NEUTRAL from Buy, new DCF-based MYR1.95 TP from MYR2.51, 8% upside, 5% FY22 yield. 1Q22 core earnings missed our and Street’s expectations on softer-than-expected ticket sales and higher-than-expected prize payouts. We trimmed our FY22F-24F earnings and downgrade our recommendation, as we believe its recovery prospects have largely been priced in. We also think Magnum lacks catalysts. This report marks the transfer of coverage to Jim Lim.

• Below expectations. 1Q22 core net profit of MYR24m fell short of our and Street’s expectations at 11% and 12% of full-year estimates. Revenue also fell short at 20% of our full-year forecast. Historically, 1Q has been seasonally stronger, making up between 26% and 30% of full-year revenues. The disappointing results were mainly due to: i) Softer-than- expected ticket sales (making up only 19% of our FY22 estimate; historically 26-28%) and ii) a higher-than-expected prize payout. 1Q22 DPS of 1 sen fell short of our FY22 estimate of 13 sen.

• Results highlight. YoY, revenue jumped 31% while core profit spiked 208%, as 1Q21 saw movement restrictions and higher prize payouts. QoQ, revenue inched up 3.7% as ticket sales rose 3.8% – a softer recovery than we had anticipated. Despite the higher revenue and PBT, the higher effective tax rate in 1Q22 weighed in while core net profit fell 22% QoQ.

• Recovery may be slower than expected. While we are cognisant that Magnum’s ticket sales in 1Q22 may have been especially weak, as punters may have turned to Sports Toto (BST MK, BUY, TP: MYR2.39) during its historic 6/58 run, we believe this set of weak results may signify that Magnum’s ticket sales recovery to pre-pandemic levels may take longer than expected. Currently, its ticket sales are at 70-80% of pre-pandemic levels. We had originally forecasted for ticket sales to recover to such levels in FY23, but we now expect this to happen in FY24 – mainly as punters seem to be financially worse off and/or have increasingly turned to illegal number forecast operators or NFOs.

• Forecasts. Post the results, we slash our FY22F-24F earnings by 30-15%, mainly on lower ticket sales and higher prize payout assumptions. Due to the lower earnings and disappointing dividends, we also reduce our FY22F- 24F DPS to 9-13 sen from 13-16 sen. We increased the risk-free rate to reflect the current cautious market sentiment. Hence, coupled with the lower earnings, we lower our DCF-derived TP to MYR1.95. Our TP includes a 0% ESG premium/discount. We downgrade Magnum to NEUTRAL, as: i) The stock lacks re-rating catalysts, ii) its recovery prospects have been priced in (in our view), and iii) ticket sales may recover slower than expected.

• Key upside risks include a faster-than-expected recovery in ticket sales, favourable changes to gaming taxes, and luck factor. The opposite represents the downside risks.

Source: RHB Research - 20 May 2022